THE NC STATE ETHICS ACT: WHAT CORPORATIONS NEED TO KNOW

1. THE NC STATE ETHICS ACT: WHAT CORPORATIONS NEED TO KNOW A Presentation for April 2008

2. Overview • Corporate and Political Ethics • North Carolina Ethics Act • Campaign Finance and Foreign Nationals

3. Enron CEOs Lay and Skilling convicted of fraud, conspiracy, false statements and insider trading; CFO pleaded guilty to fraud; Executives convicted of fraud, money laundering and conspiracy to commit fraud; Treasurer convicted of fraud WorldCom CEO convicted of fraud and falsifying statements; CFO pleaded guilty to conspiracy to commit fraud and falsifying statements; Controller and Accounting Director pleaded guilty to fraud Tyco CEO and CFO convicted of fraud and enterprise corruption; Board member convicted of fraud Corporate Ethics in the News 3

4. State Meg Scott Phipps Jim Black Thomas Wright National William Jefferson Jack Abramoff Duke Cunningham Political Ethics in the News 4

5. NC Ethics ActEffective January 1, 2007 • Places a general ban on the receipt of gifts or anything of value by state legislators, public servants, or judicial officers from lobbyists and those whom the person believes are seeking to do business with the state. • Broadens the definition of Lobbying • Defines Covered Persons/Designated Individuals in Executive Branch • Requires quarterly and monthly reporting for lobbyists and principals, in addition to yearly registration • Reporting may be triggered by non-lobbyists as well 5

6. New Changes to NC Ethics Act The NC Ethics Act was updated during the 2007 Long Session. • House Bill 1110— State Government Ethics Act Technical Changes Amends definitions of Authorized Official and substitutes “thing of monetary value” for gift • House Bill 1111— Clarify State Government Ethics Act Clarifies gift ban on government contractors as well as a number of other issues (i.e. Double Jeopardy, Revolving Door provision, food exceptions, etc.) • House Bill 1737— Legal Expense Funds Requires disclosure of funds for purpose of funding a legal action, taken by or against an elected officer

7. Key Definitions and Distinctions • Lobbying • Lobbyist • Principal • Covered Person and Designated Individual • 5% Safe Harbor Clause

8. What Is Lobbying? • Unlike law prior to January 1, 2007, “building goodwill” is now included in the definition of lobbying. • Definition of lobbying also extends to dealings with the Executive Branch. .

9. Defining Lobbying (9) Lobbying. -- Any of the following: a. Influencing or attempting to influence legislative or executive action, or both, through direct communication or activities with a designated individual or that person's immediate family. b. Developing goodwill through communications or activities, including the building of relationships, with a designated individual or that person's immediate family with the intention of influencing current or future legislative or executive action, or both.

10. Defining Lobbying • The term lobbying does not include communications or activities as part of a business, civic, religious, fraternal, personal, or commercial relationship which is not connected to legislative or executive action, or both. • Likewise, gifts in this context are also excluded if not for the purpose of lobbying (included in the reasonable standard).

11. Who Is A Lobbyist? • Previously, only individuals lobbying legislators directly related to legislation were required to register with the NC Secretary of State and file regular disclosure reports. • Now, unless an employee’s job description fits the 5% safe harbor discussed below, individuals involved in “lobbying” as defined above must register with the NC Secretary of State’s Office and file regular disclosure report (as do their principals). • Effect of new law on two common situations: 1. “Ordinary” Lobbyist 2. Government Sales Personnel

12. 5% Safe Harbor • "...In no case shall an employee be considered a lobbyist if in no 30-day period less than five percent (5%) of that employee's actual duties include engaging in lobbying as defined in Subdivision (9)a of this section or if in no 30-day period less than five percent (5%) of that employee’s actual duties include engaging in lobbying as defined in subdivision (9)b of this section."

13. What Is A Lobbyist Principal? Principal is defined as the person and/or entity on whose behalf the lobbyist lobbies.

14. Covered Persons and Designated Individuals • A designated individual is defined as a “legislator, legislative employee, or public servant.” §120C-100(a)(2). • The term covered person is also used in certain places in the Act, and is defined as a “legislator, public servant, or judicial officer,” or an individual identified on the Commission’s list. §138A-3(10). • Lists of covered persons may be accessed at http://www.ethicscommission.nc.gov/cpersons.html.

15. The Gift Ban • What is included in the Ban? • Exceptions to the Ban • Public Events exception • Educational Events • Events by non-principals

16. What Is Included In The Ban? There is a general ban on the receipt of gifts or anything of value by state legislators, public servants, or judicial officers from lobbyists and those whom the person believes are seeking to do business with the State.

17. Public Events Exception Requirements: • Must invite all legislators and legislative employees and be open to public; OR • Invite legislators and/or legislative employees plus a recognized group, AND • 10 individuals from host actually attend, OR • All shareholders, members, etc. of host are notified and invited to attend, OR • Gathering is subject to Open Meetings Law.

18. Public Events Exception • Open to public and at least 10 public servants are invited; OR • Gathering of a governmental body subject to Open Meetings law where entire board OR at least 10 public servants are invited, OR • Meeting of host to which entire board, of which public servant is a member, OR at least 10 public servants are invited AND at least 10 other individuals attend OR to which local shareholders, members, etc. are notified and invited.

19. Application to Specific Situations • Attendance at Sporting Events • Educational Briefings and Site Visits • General Entertainment • Other Funding Sources

20. Attendance At Sporting Events • Arguably, these exceptions are needed only where the company is a “principal.” If there is no registered lobbyist (via choice or the 5% safe harbor), then only the $200.00 per quarter reporting obligation applies. • Invite a small delegation and/or recognized group. • Invitee pays face value on the tickets or other such benefit, thus removing it from the gift definition under §138A-32(15). • Finally, an elected officeholder may be able to use campaign funds.

21. Educational Briefings and Site Visits • Transportation and lodging is only allowed to be provided free of charge in the context of travel and lodging for an educational meeting or legislative conference. • Site visits would also seem to fall within the educational exception. • Informational materials are generally exempt from the Act.

22. General Entertainment • The ban is fairly clear as to registered lobbyists and their principals. • However, absent a registered lobbyist, it appears a company or employee could entertain legislators and Executive Branch officials with no limit and reporting only when the threshold of $200.00 per quarter is crossed. • Ability of company to reimburse where company is a principal to someone else as a registered lobbyist is unclear.

23. Other Funding Sources §163-278.16B still allows candidate committee campaign funds to be used for “expenditures resulting from campaign for public office” or “expenditures resulting from holding public office.” Arguably, many activities could fall into this category.

24. Reporting and Disclosure • The problem with using any exceptions under the Act is that they are only exceptions to the general ban on gifts, not exceptions to reporting requirements. • The reporting scheme requires quarterly and sometimes monthly reporting for lobbyists and principals. This is in addition to yearly registration requirements for both. There are certain registration and reporting requirements where activities exceed certain thresholds in the absence of a lobbyist and principal.

25. Campaign Finance: Contribution Limits North Carolina $4,000 per candidate or PAC per election Federal Corporate contributions are prohibited in North Carolina and under federal law.

26. 527 Political Organizations IRC defines a 527 as an organization formed to influence the “selection, nomination, election or appointment of any individual to any federal, state or local public office or office in a political organization, or the election of Presidential or Vice-Presidential electors.” • Contributions received by a 527 organization are tax-exempt. • A 527 organization may: • Engage in “issue advocacy” communications • Lobby the general public and government officials • Organize get-out-the-vote and voter registration efforts • Endorse candidates • Receive unlimited corporate or individual contributions • Sponsor a political action committee (“PAC”)

27. 527 Organizations • Required to file initial notice with IRS and file quarterly disclosure reports with the IRS. • These organizations are not regulated by the Federal Election Commission. • A 527 may not: • Contribute directly to candidates • Make express advocacy communications • This could trigger status as a “political committee” subject to state or federal election laws • Make corporate-financed electioneering communications via TV, radio, or, in North Carolina, via mailings or telephone banks

28. Political Action Committees(“PACs”) Political Action Committee— A combination of two or more individuals that makes, or accepts anything of value to make, contributions or expenditures and has as a major purpose to support or oppose the nomination or election of one or more clearly identified candidates. • A PAC is organized under §527 of IRC and all contributions are tax-exempt. • A PAC: • Engages in express advocacy. • Contributes to candidate campaign committees, political party committees, other political committees. • Regulated by the Federal Election Commission and/or applicable state and local regulatory agencies.

29. 501 (c) Organizations • 501(c)(3) s: Charitable or Educational Organizations • Examples include Red Cross, March of Dimes • Exclusive purpose to further its chosen charitable or educational cause • 501(c)(4) s: Social Welfare Organizations • Examples include Sierra Club, National Rifle Association • Primary purpose to advocate public policy initiatives and educate the public on policy issues • 501(c)(6) s: Trade Associations and Business Leagues • Examples include chambers of commerce and National Association of Home Builders • Formed by businesses and individuals associated with a particular industry to further certain policy or economic objectives

30. AForeign National includes any individual who is not: A U.S. citizen; A U.S. national; A permanent resident of the U.S.; or A corporation that is incorporated or domiciled in a foreign country. Federal Law prohibits foreign nationals from making, or being solicited for, political contributions at the federal, state or local level. Participationby Foreign Nationals

31. Participation by Foreign Nationals Foreign Nationals are prohibited from: • Making contributions to any committee of a political party • Making any expenditure, independent expenditure, or electioneering communication • Making any contribution in connection with a federal, state or local election • Making any contribution to Presidential Inaugural Committees Implications on Corporate Contributions: If a corporation is a subsidiary of a foreign national, the parent company cannot subsidize a contribution or control a US subsidiary’s PAC Implications on PACs: PACs must exercise due diligence with the use of corporate records or a certification from donors

32. North Carolina Statewide Candidates Lieutenant Governor Dan Besse (D), Winston-Salem Hampton Dellinger (D), Durham Pat Smathers (D), Canton Walter H. Dalton (D), Rutherfordton Greg Dority (R), Washington Jim Snyder (R), Lexington Robert Pittenger (R), Charlotte Timothy Cook (R), Brown Summit Governor Bev Perdue (D), New Bern Dennis Nielsen (D), Nashville Richard H. Moore (D), Kittrell Bill Graham (R), Salisbury E. Powers (R), Roseboro Fred Smith (R), Clayton Pat McCrory (R), Charlotte Robert (Bob) F. Orr (R), Burnsville Treasurer David Young (D), Asheville Janet Cowell (D), Raleigh Michael Weisel (D), Raleigh Bill Daughtridge (R), Rocky Mount Attorney General Roy Cooper (D), Raleigh Bob Crumely (R), Asheboro

33. North Carolina Statewide Candidates Commissioner of Labor John C. Brooks (D), Raleigh Mary Fant Donnan (D), Winston-Salem Robin Anderson (D), Cary Ty Richardson (D), Middlesex Cherie Berry (R), Newton * Secretary of State Elaine Marshall (D), Lillington * Jack Sawyer (R), Mebane Superintendent of Public Instruction Eddie Davis (D), Durham June Atkinson (D), Raleigh * Eric Smith (R), Reidsville Joe Johnson (R), Tryon Richard Morgan (R), Eagle Springs Auditor Beth A. Wood (D), Raleigh Fred Aikens (D), Raleigh Les Merritt (R), Zebulon * Commissioner of Agriculture Ronnie Ansley (D), Wake Forest Steve Troxler (R), Brown Summit * Commissioner of Insurance David C. Smith (D), Durham Wayne Goodwin (D), Rockingham John C. Odom (R), Raleigh * Denotes Incumbent